Structured Notes typically combine two or more futures contracts to generate cash and pay it as yield.
There are thousands of contract variations designed to help reduce or exploit market uncertainty. There must be a buyer and seller on each side, one being defensive (bearish) and the other optimistic (bullish).
- Farmers sell future contracts on their produce or livestock to lock in the price.
- Airlines buy contracts for future fuel deliveries to ensure that fares will cover costs.
- Companies buy currency futures to protect from unwanted price changes.
- Investors buy put options insuring a minimum value for a stock position.
- Speculators buy call options to capitalize on a stock’s possible upswing.
The more prices fluctuate, the greater a seller’s risk, so contract premiums can get very expensive. So, the turbulent markets of 2020 have provided unusual opportunities.
Integras Partners has tailored three different notes to provide attractive income during this recession.
The first was issued mid-March when oil prices collapsed. Our Chief Investment Officer, Keith Johnson, believed that the largest energy companies were unreasonably discounted. So, he designed a note based on the price movement of Exxon Mobil [XON], Conoco Phillips [COP] and Chevron [CVX]. Exxon, for example had dropped 34% since the beginning of the year. If none of the stocks fall another 40%, this note pays 4% every quarter (16% APY). The note will pay for six years, or full principal will be returned if all three stocks are above their benchmark after the first year.
The second note was issued mid-April when hospitality companies were getting crushed. For this one, Keith selected Marriott International [MAR] which was down 48% for the year and Darden Restaurants [DRI], which had dropped 41%. With dramatic uncertainty for hotels and restaurants, the contracts on these stocks at the time generate a 35% yield for this note! Today, both stocks are above their thresholds and the note will payout at the anniversary. Otherwise, unless they drop more than 50% from today’s prices, it will payout for three years.
The most recent note is based on four prominent electric utilities, paying a monthly coupon at a 10% annual rate. It will also pay up to three years and redeem at full value if none of the stocks have lost 40%.
Utilizing these notes reduce portfolio risk without owning the stocks, and greatly increases the yields vs. dividends. The impact on risk-adjusted portfolio returns are significant when markets are volatile and individual stock price moves are extreme.
Integras Partners works with successful individuals and families to align investments with personal goal timeframes. This is solely an illustration of strategic investing and not an offer to sell or promise of performance. For more information on how we might help you, click here.
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